GDP goes negative

0:05Pushkin. Aidan, do you know how I'm feeling? How are you feeling? Like Lizzo, I am feeling good as hell. There are times when it is hard to be a financial journalist. This is not one of those times. It is all kicking off. Markets have changed direction and they're on the move. There's tons of economic news. Companies are reporting. The president is crazy. There is just so much to write about. It's an embarrassment of riches. Yes, but if you start playing the flute and twerking, I'm leaving. This is, of course, Unhedged, the markets and finance and twerking show from the Financial Times and Pushkin.

0:53I am Rob Armstrong, coming to you from beautifully sunny New York City and joined by Aidan Reiter. Hello. So there's so much to talk about, but I think we should start with the GDP report, which was both interesting and a bit confusing. And of course, the headline here is that it had a negative number attached to it. Definitely looks very bad on its surface. Yes. If you look, to go to minus 0.03 % all of a sudden looks like a sudden stop for the U.S. economy. But this is not quite true. Yeah, minus 0.3, again, is a really big change from the U.S. economy that had outshone all growth expectations and forecasts over the last two years.

1:36Two years, yeah, had been killing it. Well, the first thing is, let's talk about the good stuff in the report, and then we'll explain how the good stuff still left us with a minus 0.3%. The good stuff is that consumption held up. Yeah. So U.S. household consumption in real, that is inflation-adjusted terms, up 1.8%. Good. Way over expectation, which was 1.2%. Yeah. And it's about, it's kind of where we've been. So we're not accelerating, but we're still out there buying stuff. Yeah. People are buying. The American consumer is insatiable as always. Yeah. And business investment. Now, now we get into the tricky stuff.

2:14Business investment was very good. Yes. Crazily good. Crazily good. So purchases of electronic equipment alone, or it's, I guess the term is information processing. Information processing equipment. So computers, those purchases alone added a percentage point to GDP. It was a bananas number up like 20 odd percent. 22.5 percent, I believe. Yeah, it was a bananas number. So that is like businesses are investing. It looks like that. And we had this number from Microsoft, their earnings number. And Microsoft and Meta actually reported yesterday the artist formerly known as Facebook, as I like to think of it.

2:54And they said, we are still spending money hand over fist. We're shoveling money into the AI inferno. Which was not a guarantee, especially since - No, we've been worried about that. We're still in the quarter where we had DeepSeek revelation, which we thought would really transform this entire ecosystem. Yes. I mean, NVIDIA, which is, you know, if you think about people are going down into the mines, NVIDIA is the shovel seller. They're off 20 % this year. Yeah. So that was a big number. But this is where we get into the points of confusion. And the points of confusion are about inventory growth and about imports.

3:31So I guess we should understand the, we should explain rather the dynamics of the GDP calculation. That is the little bit of algebra we do or summing up. It's not even algebra. No, it's algebra. There's different variables. Yeah. That get us to the GDP number. And the point about this is that imports are a minus in that equation. And we had a huge surge in imports this quarter. Yeah. GDP at its base is looking at your gross domestic output, the things you make and invest and buy in America. Yes. Imports inherently are not made in America. They are made somewhere else. Yeah. So the point is you take those out of the equation in order to both not double count them in what you buy and what you invest in.

4:12And also because they're just not made in America. Yeah, yeah. So the avoiding double counting point is this. if somebody buys something in America, that's a plus for GDP. Yeah, either C or I. It's either consumption or investment. Yeah. And if that thing comes from somewhere else, you don't want that actually to be a plus because it's not American production. So you subtract it. And so if you have pieces of a larger thing like a car, right? You imported the wheels, but somebody bought the car. Well, you have to take out the wheels because they were imported. Yeah, yeah. But the point is there's weird timing things with this.

4:47Yeah. So as it turns out, like the timing of imports and consumption aren't exactly matched. And so you get these quarters where you have this huge surge of imports and you have to subtract that out because that's how the equation works. And it makes GDP look like it's shrinking, but it's not really that clear that it is not really shrinking. I mean, usually this isn't a problem, but with the onset of tariffs, it appears like that people are really bringing in their imports and pulling ahead that demand to avert whatever price rises there might be. Look, it's kind of the most natural thing you could possibly expect.

5:24Yeah. Like, if you think there is a big price increase coming, you buy ahead of it. Yeah. So we had imports surge 41%, which is a really big change. And business inventories surged massively. Of course, we don't know exactly what is being – this is an early number. We don't know exactly what is being imported. We don't even know exactly what is consumption versus inventory. It's a model-based calculation. But the point is, as best we can tell at this point, people are filling the shelves of the warehouses ahead of tariffs. Yeah. So that results in a huge decrease from the consumption equation up to almost 5%.

6:02Yeah. So that's why it looks like GDP shrank when it could not be. That being said, we don't really know to what extent that is pulled ahead demand, right? Are we just going to see fewer imports in future quarters? Because then it should be a wash. Yeah. Or was there some other reason people were doing this? They're saying, oh, well, I need to import now because I can't get these products in America. And you know what? Next quarter, I'm going to have to keep on importing. We just don't know. I think we also just have to step back and say it is amazing that one person with a social media account has tied the U.S.

6:38GDP equation into a pretzel. Yeah. You know, that person does happen to be the president. But this kind of on again, off again, up, down, crazy left, right tariff campaign is really distorting the U.S. economic numbers. It's a remarkable phenomenon. Low economic numbers, right? We import from other places. It's going to affect their other economies are going to look great this quarter. But yeah, it's a pretty good argument against the imperial presidency. So in the newsletter yesterday, I said the economy right now is like a before and after advertisement. And we know the before is actually OK in the sense that consumption is holding up.

7:24All those bad surveys we had about small business sentiment and consumer sentiment, those have not showed up in people not buying stuff. Or at least they didn't show up in the first quarter of the year. In the first quarter. Keep in mind that tariff day, big liberation day, was April 2nd, which is the second quarter of the year. The second quarter. So now let's talk about what, if anything, we know about the post-liberation day economy, about what is happening now. Yeah. I mean, sentiment continues to be terrible. Yes. People don't feel good about this economy. They expect prices to rise. But we are only seeing that in kind of fits and starts in the actual hard data.

8:04And remember, we've talked about this before. There's soft data, which is surveys, which have just been across the board awful. And there's hard data, like actual measures of the economy. Transactions. Transactions. And it's a mixed picture there. You've gotten some things that are just terrible. Housing has looked awful. Housing has always looked awful in America, at least in the last couple of years. You have some really bad orders of durable goods. So people aren't spending on the big pricey items. That's important for an economy. Yeah. And of course, the durable goods orders, if you include housing as a durable good, those are kind of like the defining feature of the business or economic cycle.

8:41In a low point in the cycle, people don't buy washing machines unless they have to. And in the high point in the cycle, they buy new cars, new washing machines, big furniture sets, whatever. Yeah, and those numbers are crawling to like a stop. Yeah, that is not good. However, that said, I was very happy to see Visa, who has an excellent window into consumer spending because so much spending goes over their card network, say that not only was spending strong in the first quarter, but they also report, they reported like day before yesterday, yesterday, anyway, it's all a blur now. However, they report on the spending patterns they're seeing up until the moment they report.

9:25So they have a window into the first three weeks of April and spending actually is picking up a little bit. February was bad. March is better. And April looks better, too. So, you know, and maybe all the like people who don't spend are on the MasterCard network or something or cards at all or whatever where they're on their Discover card. Yeah. That said, that is a very good reason to think that consumption is holding up up until this week. Or it's very possible that people are pulling ahead their demand. It's similar to the imports and buying the stuff right now. Always finding a way to see the glass half empty, Aiden.

10:05Let's talk about, okay, company reports. So we already referred to Microsoft coming out with happy news. My favorite company, Vulcan Materials, which makes rocks. Not Spock's Vulcan. It's a different volcano. They make aggregates. So, like, they crush up the pebbles that go into the highways and roads and the substrate for building sites and all of that stuff. And crucially, that's a domestic business. A domestic business. Because it doesn't make sense to export rocks. And they had the immortal line. I think you pulled this one out. We're still selling rocks. So, that's okay. But the McDonald's number, which came out today, was not good.

10:47Very bad. less visits sales were down three percent or something mcdonald's always presents an interpretive challenge to me because some people might trade down to mcdonald's like if you are kind of a like chipotle person and you feel a little broke maybe you go to mcdonald's instead but for a lot of people any kind of meal out with the family is a big deal and so you know are people trading up or trading down to McDonald's, but it can't be a good sign that they're having same store sales problems in the US. Yeah. I mean, there's a bunch of other brands that have had issues. I mean, Starbucks is a whole mess in and of itself, but it also reported terrible earnings this quarter.

11:28But at the same time, in addition to Visa, Bank of America, JP Morgan, all these other places saw spending continue to be robust. It wasn't just Visa. So it's kind of hard to interpret. And we've talked a lot on this show about the K-shaped economy. Like basically the American consumer is fine unless you are at the low end of the income scale and you have floating rate debt. So if you're like young and you're not making a ton of dough and you have a big car note to pay, it is tough out there. But I would say it's not just the low end consumer. When we talk about the K-shaped economy, it almost sounds like, you know, both sides of the K, the upper leg and the bottom leg are the same size.

12:07But really in the U.S., a large amount of consumption is done by a very small amount of people who have the most income. The upward pointing arm of the K. Yeah, the upward part of the K is much smaller in terms of population size than the much larger middle to bottom part of the K. So, you know, if you look at consumption trends and, you know, essentially those consumer sentiment surveys we've talked a lot about, they measure whether people are in the top trintile, tercile? Tr - Tersile? The top third. We'll call it tersile. Top third. We'll call it the top third. The top third. The triceratops.

12:42Something. The top third, the middle third, and the bottom third of incomes. Yeah. And, you know, the really, really bad sign for the economy is when that top third feels poorly. Yeah. Because they do the lion's share of buying in America. Yes. Not just the expensive stuff, the everything stuff. Somebody's got to buy the diamonds, Aiden. Somebody's got to buy the cashmere and the mink. But it's not even just that. It's just like buying more houses or, I mean, that's expensive too, but buying cars, et cetera. So that consumer sentiment index and reading has been negative as well, right? All income groups are falling.

13:15And if you look at the Fed, the Fed recently released data that we're seeing a record number of households just pay the absolute minimum payment on their credit card, which is clear a sign of any that people are feeling some economic distress. But it's not a huge number. It's not like 50. It's like 20 % of people are paying just the minimum or something. But that's still high. That's a worrisome, I agree, that's a worrisome signal. To me, that suggests that people on the lower end of the spectrum are either feeling the squeeze now or they're feeling ready to start the squeeze. But what the economy really needs to be worried about, I mean, all economies ideally will be providing for all their people.

13:48But if you want to look at the mass indicators, you have to be really concerned about the wealthiest consumers turning away. Yes. Okay. So we're struggling. What we're doing here is we're struggling to see kind of through the glass darkly, right? It's hard to know. I mean, people always talk about economic forecasting, but economic now casting is hard enough. What's happening in the economy yesterday is hard to figure out. So we're just trying to figure out what's going on now. Having acknowledged how hard this is, I want to talk about a couple more signals. Oil is going through the floor here.

14:22And that's not a U.S.-specific signal, of course. It's the king of the global prices. But I'm consulting my chart. It was 80 bucks in January and now it's 58 bucks. The first pass at an interpretation of that is the world economy is crashing. Is that fair? You know more about oil than I do. I mean, it shows that people are concerned about a global slowdown and a global slowdown principally driven by a trade war. Yeah. Demand is coming, is softening a little bit. Yeah. And I think that is the main thing we should take away from lower oil. We should say there are other weird dynamics in the oil world that are also bringing lower.

14:58OPEC is looking to bring more production online, which inherently increases supply and lower price. But it is a clear sign as any that we're facing a global economic slowdown, even when U.S. economy at this moment looks somewhat robust. And it's also amazing that this is happening when the marginal producer, which is the United States, our production is going down. I was looking. There's this great figure that you can look at. It's called the Baker Hughes rig count. And since time immemorial, this company, this oil services company, Baker Hughes, announces this count every week or every month, which is just how many oil pump rigs are up.

15:36You can turn your rig off or turn it on pretty quickly. And that number is falling to the floor because at 58 bucks, you're a shale producer. It's not worth the trouble to pull the stuff out of the floor. So, oil is down even when the swing producer globally is reducing production, which is very, very interesting to me and very telling. Yeah, we've talked about Trump. His aspiration is to have cheap energy, but also his aspiration is to have U.S. output be higher. Yeah. It doesn't really work. Gotta choose. You gotta choose because I think the calculated average break-even price, so the point at which shale producers can actually profitably get oil is like 60 bucks, and we're already below that.

16:13We're below it. So it actually costs producers money to bring oil out of the ground. Yeah. The average producer. So, yeah, I mean, it's a clear sign that things are slowing down and things aren't necessarily working well in the U.S. economy if that is the output. Is it to flow cheaper oil when we are increasing production at the same time? Okay. One more. I want to talk about, I'm conscious of time and I want to talk about one more market signal or trade signal, which is we had on Sunday, we had in the FT this rather chilling story about the ports, the US ports expectations of boats coming here from China, port of Los Angeles and et cetera.

16:51We mentioned this on the show before, but I may be remembering this wrong, but I think going forward, to use that awful phrase, the port of L.A., it's like shipments from China down a third or something like that? Yeah, it's a huge, huge decrease. So I have, there's this, things are going to be different when the boats actually start showing up in L.A. and New Jersey, and they are one third less full than they were. Yeah. Less stuff is going to go from those boats onto trucks and less trucks are going to go to the stores. And what is going to happen? But, I mean, it depends on whether or not we've sufficiently built up our stores with all the inventory and all the imports we brought forward in the last quarter.

17:33Again, it's unclear whether or not this was really demand pulled forward or something else. Yes. I would assume it was, though. But what's going to happen is you have less consumption. Yeah. Because there's less things to buy or we'll start running out of things. Or at very least, Mr. Glass Half Empty. That is the core question. Good friend of Unhedged, James Athey, who works at the Marlboro Group, summed this up to me very well in an email this morning, which is just this. If you are importing less stuff, there are two things that can happen. You can either produce more stuff to make up the difference, or you can just consume less.

18:06We're about to figure out if the tariffs stay in place, which, as you know, I'm skeptical about. Taco trade, Trump always chickens out. my view different from yours. Trump always chickens out taco. It's Rob's new phrase. Yeah, yeah. I'm going to use that until I'm going to make that a thing. I know you disagree about that, but is there going to be more domestic production or less consumption? That is going to be the question going forward. And on James's point, let me just read you something that Donald Trump said yesterday in a press conference. You know, somebody said, oh, the shelves are going to be open.

18:47Well, maybe the children will have two dolls instead of 30 dolls, you know, and maybe the two dolls will cost a couple of bucks more than they would normally. Now, the president of the United States says a lot of things, and some of them he means and some of them he doesn't, But what he is saying right there is that part of the fall in imports is likely to be made up by lower consumption, not higher production. He's saying it right there, talking about dolls. He's essentially making light of the fact that Americans will be poorer. Right. Right. In part. In part, right. You have the same amount of money, but because of prices going up or other external factors, you are not able to buy as many things.

19:34That is the result of a misguided economic policy that makes more Americans impoverished for feeling the squeeze, especially Americans on the lower end of the K, of the K-shaped economy. He does throw a maybe in there. And I am going to pour one out for hopes that production does rise, but I will say that it takes some time. We can end on this point. As of yesterday, the administration is starting to recognize that tariff policy comes with hard tradeoffs. And that is a moment to be marked. That wraps up our doll coverage here on Unhedged. We will be right back after the break with Long and Short.

20:19Save the dolls.

20:28Welcome back. This is long and short in which we go long things we like and short things we don't like. Aidan, what do you think? I am long Brazilian soybean prices. Soybeans are the US's largest agricultural export and China historically has been our biggest buyer. When tariffs went into effect in 2018, there was this huge scramble because China stopped buying American soybeans. So Brazilian soybeans, which are the second largest, and I actually think they are now the largest on the market, they had this crazy price premium for a couple months. When Liberation Day happened, you saw the same effect, right?

21:04In futures markets on soybeans, American soybean prices went down. Brazilian soybean prices went up. It's since come off, and there are reasons to believe there won't be as big of a gap. But I feel like with China pulling away from the US, there's about to be some expensive Brazilian soybeans. You heard it here, listeners. I am going to be long blackouts. And I say that not to make light of or minimize the hardship of my Spanish friends who have suffered a major blackout this week. But I think back extremely fondly these 22 years to the big New York blackout in 2003, which was a moment that really made me feel like a New Yorker where like neighbors came together and everybody's on their stoops talking.

21:50and lighting candles. And it was really one of my favorite New York experiences was the way people came together during that blackout. And blackouts serve as a very important reminder that it's important to spend money on infrastructure. Mennies have to invest in themselves. So we don't want constant blackouts, but once in a while, a blackout is good for us. Listeners, there will not be an Unhedged podcast blackout. We will be back in your feeds next Tuesday. Until then, stay sharp.

22:44Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Rob Armstrong. Thanks for listening.

23:14Thank you.